Tag Archives: GDP

Gross domestic product, also known as GDP, is the monetary value of all the finished goods and services produced within a country’s borders. It’s a important economic measurement because it is one of the key methods used to gauge whether an economy is expanding or contracting. The overall dollar value per year is seen a snapshot of what value a specific country or region produced.

Below I have pulled a sample of countries from the developed world. You will see a graphic representation of the year-to-year change in GDP measured as a percent. I have also included a linear line, which is used to help show the rate which the country’s GDP rate of growth/contraction is changing overtime.

What you will see is that across the countries sampled, all have a downward trend since 1961 to 2015. Some are more steep than others, yet every country is not performing as well as it once did. This ultimately has an impact on your ability to realize investment returns. It also speaks to the strategy central banks around the world are taking. The banks are focusing on keeping interest rates low or even negative in order to put pressure on business and consumers to invest in projects and spend their money. Low borrowing costs equate to less risk when investing in a project or buying a debt financed item.

Low interest rates also cause the behavior of investors/savers to change. Since secured bank deposits earn little to nothing, other avenues must be used to realized a given return on your investment. This is why when the Federal Reserve, European Central Bank and Bank of Japan keep rates low or lower interest rates, the stock markets around the globe respond positively. At face value it seems odd, since keeping rates low is an indication of economic weakness, yet a consequence of low rates is the fact that savers must look to tools with greater risk in order to gain a return. This pushes money that would typically be outside the market into the market. Remember, all the nations listed below have a large population of retired or nearly retired people. These people are focused on saving, living off their savings and reducing their consumption of goods. They need a return on their money to live comfortably.

Low borrowing costs also enable companies to do share buybacks, which reduce the supply of their stock.

For some reason the USDA was a little over a week late reporting the August food stamp data (Released this past Friday night). The most current food stamp measurements do not paint a pretty picture. The August numbers show food stamp usage at a record high of 47,102,780. Of this record-setting number, 420,947 participants were added between July and August. This month-to-month increase was the largest jump seen within one year.

In terms of economic indicators, a lot of attention is paid to changes in the unemployment rate . Between assumptions added into the unemployment calculation, such as seasonal adjustments and the fact that those who quit looking for work fall off the count of the unemployed, the unemployment rate is a murky statistic at best. The number of people receiving food stamps is a pretty straight forward measurement.

What is the rate of people on food stamps telling us? It’s demonstrating that an increasing number of people in the U.S. are claiming they are financially unable to provide a basic standard of living. Should you bet on a vibrant economic recovery knowing such information?

The U.S. currently has a population of 314 million people. Of the 314 million, roughly 239 million are adults (approx 76% of the population is over 18). If we divide the number of people on food stamps by the approximate adult population, we get that nearly 20% of the adult U.S. population is receiving food stamps.

As an indicator of future economic health, the count of those receiving food stamps does have some weakness. The number that should have been released at the very end of October or the first of November provided a measurement for August. That means not only is the information historical, it’s 2 months old. In terms of investing, it’s best to have information that is as fresh as possible and forward-looking.

In a sense, the increase/decrease of those receiving food stamps between months does provide a forward-looking gauge. You would expect that those signing up for food stamps would be in a situation where they’re experiencing a personal economic contraction. Assuming a miraculous financial turnaround does not happen in the person’s life, the contraction probably will last a number of months. Therefore, it is reasonable to extrapolate that increases in food stamp rolls will lead to an economic contraction in spending.

Consumer spending accounts for about 70% of U.S. GDP. If the number of people receiving food stamps continues to increase, we will continue to find ourselves in a cycle where a smaller portion of our population has the financial means to aid in the growth of consumer spending. At the same time, the federal government will be increasingly burdened with the need to allocate more funds to support food stamp recipients. More tax dollars will ultimately be needed to support the additional recipients, which results in an additional drag on the prospect of economic growth. This is a vicious cycle.

With the looming uncertainty of the ‘fiscal cliff’ and the news received regarding food stamp recipients, I would recommend proceeding with caution when considering new investment positions.

If you have not come across the latest monthly installment by Bill Gross, you certainly will want to give it a read (linked below). Bill does a great job this month providing a stark dose of macro economic reality. It’s better to know what you’re up against than pretend what you’re up against isn’t there. Since the discussion is focused on a ‘big picture’ centric view of the U.S. economy, it is relevant to investor or non-investor.

Three key takeaways from Bill’s October column…

The U.S. has federal debt/GDP less than 100%, Aaa/AA+ credit ratings, and the benefit of being the world’s reserve currency.

Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years.

Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.